Jack Tramiel has Atari Turned Around--Halfway

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New video games and strong sales in Europe may not be enough

Maria Shao in Sunnyvale, Calif.
Business Week

June 20, 1988

The deal is steeped in Silicon Valley lore. Nolan Bushnell, the legendary software designer who invented the first successful video game, has agreed to ply his craft again for Atari Corp., the company he founded in 1972. Bushnell's client is the equally legendary Jack Tramiel, who, as chief executive of Commodore International Ltd., pioneered the home-computer market. For $5 million, Bushnell is supposed to give Tramiel the 20 or so games needed to boost Atari's video business. The video game comeback is one leg of Tramiel's strategy for rebuilding Atari. In the four years since he bought the moribund home-computer and video-game maker from Warner Communications, Tramiel and his three sons have already pulled off an impressive turnaround. Last year the company earned $57 million on revenues of $492 million.

But the Tramiels have a lot more fixing up to do. Their personal computers are doing well in Europe but haven't made a dent in the U. S. market. Their plan to turn around Federated Group, a chain of electronics stores, is behind schedule. And even with Bushnell, Atari will suffer if the latest video game fad dies out. ''Tramiel took Atari, an opportunity that was dead, and turned it around,'' says Charles Wolf, a First Boston Corp. analyst. ''But how far can he carry the story?'' Not far, if Wall Street is a guide. Despite steady earnings growth, Atari's stock has rattled around between 7 and 9 for several months, down from a precrash high of 16 1/4.

'BLOODY CONCLUSION.'

Even if Bushnell can produce some hits, the current video game revival may already be past its prime. For the past two years, Japan's Nintendo has dominated the business and now has 70% of the $2.3 billion U. S. market. But as with the first boom, which peaked at $3 billion in 1982, there will also be ''a fiery and bloody conclusion to this fad,'' predicts Paul Valentine, a toy analyst at Standard & Poor's Corp. Not so, says Sam Tramiel, Atari's president and Jack's eldest son: ''There will be peaks and valleys, but the category will never die.'' Just to make sure, Atari will double its advertising budget for video games, to $10 million this year.

Atari's most immediate problem is Federated, a 62-store chain in California and the Southwest. The group lost $9.6 million on $71.5 million in first-quarter sales, and Atari expects it to lose $5 million to $10 million for the year. Atari has taken $60 million in pretax write-downs on Federated and fired the previous management, whom it accuses of inflating Federated's assets on financial statements. The company has cut Federated's staff by 28%, to 1,950, and shut six stores. Most consumer electronics chains have struggled recently, and economic woes in Texas, where many Federated stores are located, have compounded the retailer's problems. But Atari denies industry rumors that it wants to sell Federated.

The Tramiels' ambition to crack the U. S. computer market is faring little better. The Atari ST, introduced by Jack Tramiel as the bargain hunter's answer to Apple Computer Inc.'s Macintosh, has never clicked in the U. S., though it was Europe's No. 5 brand in unit sales last year. One problem is American consumer resistance to machines that can't run software designed for the IBM PC or other popular machines. Atari introduced its own PC clone, but the product has never caught on. The biggest stumbling block is that Atari's video game image puts off consumers looking for a serious computer. Now, says Sam Tramiel, plans for expanding in the U. S. are being pushed back because of the industrywide chip shortage.

The Tramiels aren't cutting back on ambition, though. Sam Tramiel aims to sell 50% of Atari's computer output in the U. S. by 1991, compared with less than 20% now. And Atari Chief Financial Officer Gregory A. Pratt says the company's goal is 20% of worldwide microcomputer sales by the early 1990s. That would be a huge jump from the 2% share that market researcher InfoCorp says Atari held last year.

Atari insists it can crack the computer market by using the same formula that Jack Tramiel championed at Commodore: low prices. But ''it's not the same kind of world. There were no real established players at that time,'' saysDavid Grady, publisher of The Grady Report, a computer newsletter in Redwood City, Calif. ''Now being Jack Tramiel isn't enough.'' He'll have a hard time repeating the success he had at Commodore.

Photograph: BUSHNELL: THE LEGENDARY GAME MAKER WILL GET MILLIONS TO WORK HIS MAGIC FOR ATARI GARY SIGMAN